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Study of financial statement restatements in the US

10 Apr 2008

The United States Treasury Department has published a study of financial statement restatements by US companies during the period 1997-2006: The Changing Nature and Consequences of Public Company Financial Restatements.

The study, part of Treasury's efforts to encourage US capital markets competitiveness, was conducted by University of Kansas Professor Susan Scholz. Its purpose is "to understand characteristics and consequences of financial statement restatements for violations of US Generally Accepted Accounting Principles (GAAP) over this decade". The study analyzes 6,633 restatements over this period.

These are the broad findings of the restatements study:

  • Over the 1997-2006 decade, restatements grew nearly eighteen-fold, from 90 in 1997 to 1,577 in 2006. However, the increase is largely driven by companies that do not trade on the major stock exchanges. Non-exchange-listed companies account for only 23% of all restatements in 1997, but increase to 62% by 2006.
  • Restatement frequencies begin to accelerate in 2001 – well in advance of the passage of the Sarbanes-Oxley Act of 2002. Th is acceleration is likely due in part to the economic downturn about this time.
  • The average market reaction to restatement announcements is negative throughout the study period. However, beginning in 2001, the magnitude of market reactions declines notably. This decline coincides with an increase in the number of restatements between 2001 and 2006.
  • In particular years, restatement frequencies and market reactions are associated with several disparate factors. These include overall market returns and volatility, regulatory activities, and changes in the mix of underlying accounting issues. Regarding the shift in accounting issues:
    • Restatements attributed to fraud and those affecting revenues tend to have more negative market reactions. However, the percentages of both fraud and revenue restatements decline over the decade. Fraud is a factor in 29% of all 1997 restatements, but only 2% of 2006 restatements. The proportion of revenue restatements also decreases, from 41% in 1997 to 11% in 2006.
    • On the other hand, restatements related to accounting for non-operating expenses, non-recurring events, and reclassifications typically do not have discernibly negative market reactions. Together, these groups represent about 24% of all 1997 restatements, increasing to nearly half at the end of the study period.
  • Across the decade, the average restating company increases in size, but remains similar to a comparison group of non-restating companies. Companies of differing sizes tend to restate different accounting issues, and several of the distinctions are consistent with expected variations in the activities of larger versus smaller companies.
  • Finally, restating companies are typically unprofitable even before the restatement. In the year prior to announcing a restatement, more than half of restating companies report a net loss.

Click to view The Changing Nature and Consequences of Public Company Financial Restatements (PDF 1,558k).

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New process for endorsing IFRSs in the European Union

09 Apr 2008

The European Union has formally published Commission Regulation (EC) No 297/2008 of 11 March 2008 amending the EU 'IAS Regulation' with respect to the Process for Endorsing IFRSs for Use in the EU.

The procedure requires the Commission staff to submit their recommendations for endorsement to both the European Parliament Committee on Economic and Monetary Affairs and the Council for approval. The regulation calls on the Commission, the Council, and the European Parliament to act speedily to ensure that IFRSs and interpretations are adopted in a timely manner.
Click to view Commission Regulation (EC) No 297/2008 (PDF 33k).

 

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Accounting Roundup – first quarter 2008 review

08 Apr 2008

We have posted Accounting Roundup: First Quarter in Review–2008, prepared by the National Office Accounting Standards and Communications Group of Deloitte & Touche LLP (USA).

This newsletter provides brief descriptions of pronouncements affecting accounting, financial reporting, and corporate governance issued during 1Q-2008 by standard setters and regulators including FASB, EITF, AICPA, SEC, FASAB, PCAOB, GASB, IASB, and IFRIC. It also outlines other third-quarter regulatory and professional developments. This quarterly review consists of articles, adapted as necessary, from issues of Accounting Roundup published in January and February 2008, as well as new articles for the month of March. You will find past issues Here. International developments covered in this edition of Accounting Roundup are:
  • IASB Amends Financial Instruments Standard for Puttable Instruments and Obligations Arising on Liquidation
  • IASB Revises Accounting for Business Combinations and Noncontrolling Ownership Interests
  • IASB Amends IFRS 2 on Share-Based Payments
  • IFRIC Proposes Guidance on Distributions of Noncash Assets to Owners
  • IFRIC Proposes Guidance on Accounting for Customer Contributions
  • IASB Publishes Discussion Paper on Employee Benefits
  • IASB Publishes Discussion Paper on Reducing Complexity in Financial Instrument Reporting
  • FASB Proposes to Narrow Definition of Equity; IASB Issues Discussion Paper Seeking Constituents' Views
  • IASC Foundation Releases 2008 IFRS Taxonomy

Click to view Accounting Roundup: First Quarter in Review–2008 (PDF 1,101k, 55 pages).

 

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Concern about banks' disclosures in Europe

08 Apr 2008

At a hearing conducted by the Economic and Monetary Affairs Committee of the European Parliament, Kerstin af Jochnick, Chair of the Committee of European Banking Supervisors Expressed Some Concerns about current financial statement disclosures by European banks:

We are concerned that the lack of disclosure on banks' business models and on their role in structured finance activities could make it difficult for market participants to properly assess the banks' risk profile. While the coming into force of the Pillar 3 requirements of the CRD [EU Capital Requirements Directive] and of new accounting disclosure requirements (IFRS 7) should contribute to the quality, granularity and comparability in the disclosure of exposures, the disclosures seem in many cases to be aimed at banks' immediate stakeholders – i.e. at their shareholders – and not so much at market participants in the wider sense. It may be necessary for banks to reconsider their disclosure policies and the principle they build on, especially in times of stress.

Click to view Hearing at the Economic and Monetary Affairs Committee of the European Parliament (PDF 40k).

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Deloitte Australia Insights Podcast on the 'IFRS experiment'

08 Apr 2008

Deloitte (Australia) has released a new Insights Podcast discussing IFRS-related issues.

In this podcast, Bruce Porter, leader of Deloitte's Accounting Technical group in Australia and member of the AASB, talks with Stig Enevoldsen, Chairman of the Technical Expert Group of the European Financial Reporting Advisory Group (EFRAG) and a partner of the Deloitte practice in Denmark, about the experience with IFRSs in Europe and Australia and the key IFRS challenges moving forward.
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Agenda for the joint IASB-FASB meeting

07 Apr 2008

The International Accounting Standards Board will hold a joint meeting with the US Financial Accounting Standards Board on Monday and Tuesday 21 and 22 April 2008. The meeting venue is Painters' Hall, 9 Little Trinity Lane, London EC4V 2AD.

The full agenda for the meeting can be found here. We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.
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FASB adds SEC content into its standards codification

07 Apr 2008

In January, the US Financial Accounting Standards Board began a one-year verification phase of its codification of US GAAP.

During the verification period, constituents are encouraged to use the online Codification Research System free of charge to research accounting issues. The FASB has now added portions of Securities and Exchange Commission and SEC staff content into the Codification. The Codification does not change the SEC content; instead it reorganises the content into roughly 90 accounting topics to more closely align with the non-SEC content. The SEC sections relate only to matters within the basic financial statements; they do not contain the entire population of SEC rules, regulations, interpretive releases, and staff guidance. Click for:

 

2008apr Image

Agenda for April 2008 IASB meeting

04 Apr 2008

The International Accounting Standards Board will hold its April 2008 meeting at the IASB's offices, 30 Cannon Street, London on Tuesday to Friday 15-18 April 2008. The meeting is open to public observation and will be webcast.

The full agenda for the meeting can be found here. We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.
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34 IFRS e-Learning modules are updated

04 Apr 2008

We are pleased to announce that 34 of our 35 IFRS e-Learning modules have just been updated to reflect recent changes in IFRSs.

The modules that changed most significantly are those for IASs 16, 17, 23, 28, 36, and 37 and IFRSs 1 and 2. The one remaining module, IAS 32/39 (Part 1), is under final review, and we expect to release it by the end of April 2008. The updates make the modules technically accurate for the IFRSs in force at 31 December 2007. Development of new modules for IFRS 8 and IFRIC 12 has been completed. We expect to release them in the next week or two.

 

PCAOB (US Public Company Accounting Oversight Board) (dark gray) Image

US PCAOB strategic plan 2008-2013

03 Apr 2008

The United States Public Company Accounting Oversight Board (PCAOB) has published a Strategic Plan to guide the Board's programs and operations during the period 2008-2013. The Sarbanes-Oxley Act of 2002 created the PCAOB as the independent nonprofit overseer of the auditors of public companies.

PCAOB has four primary responsibilities:
  • registration of accounting firms (including non-US firms) that audit public companies (including non-US issuers) trading in US securities markets;
  • inspections of registered public accounting firms;
  • establishment of auditing and related attestation, quality control, ethics, and independence standards for registered public accounting firms; and
  • investigation and discipline of registered public accounting firms and their associated persons for violations of specified laws or professional standards.

Click to view the Strategic Plan (PDF 112k).

 

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